TCI: Transportation & Climate Initiative
David Blackmon, Oct 24, 2019
A gasoline tax by any other name is still a tax on gasoline, isn’t it? That’s the question the governors of a dozen Northeastern states are attempting to avoid by implementing what is effectively a new gas tax on consumers via a regional “cap and trade” system.
The concept at hand in this regional gas tax scheme is similar to every other “cap and trade” system devised in any free economy, which involves the politicians trying to hide the tax from consumers by placing the point of taxation upstream, in this case with gasoline wholesalers. The Politico story linked above reveals that fact in the following paragraph:
"For the average consumer, the program will function fundamentally as a gas tax, as fuel wholesalers paying for emissions allowances pass on those costs. But policymakers prefer the term "cap-and-invest," and argue that the benefits of greening the transportation system will limit the cost impacts and keep energy dollars in the region."
How TCI Works
TCI is a form of carbon-taxing scheme devised by 12 northeastern states plus Washington DC designed to increase the cost of driving for consumers so that they use less gasoline and diesel, by switching to electric vehicles (EVs), mass transportation, bicycles and walking.
CAP AND TRADE
Simply put, TCI forces companies that sell gasoline to buy so-called carbon credits or permits at auction. This is called a cap-and-trade system which is what California utilities and some industries (primarily the cement and oil/gas industries) are required to use. As explained here, companies that emit greenhouse gases are required to buy permits based on the amount of such gases they emit. There are only a limited number of these permits in any given year (i.e. the number of them is "capped"), and this cap is reduced every year. So if the supply of the permits goes down, their price goes up. Eventually, the price of these permits will be so expensive that the companies required to buy them will either stop emitting greenhouse gases so they don't have to buy them any more, or if this isn't possible, they'll go out of business. Either way, the environmentalists win since greenhouse gases will no longer be emitted by these utilities and industries.
In the meantime, California is raking in billions of dollars from the sale of these credits. As can be seen here, the state of California made over $739 from auctions of permits just in the fourth quarter alone of 2019, and in fiscal year 2018-2019, it made over $3.2 billion. This is based off an auction price that was $17 per metric ton of carbon dioxide as of the most recent November 2019 auction. It's easy to see why this fundraising scheme is so attractive to states in the northeast interested in TCI. It's basically an open checkbook for them to spend on whatever they like.
Does cap and trade work? According to this major study here, it has not improved air quality in California. This is because the credits polluters are required to purchase are sold primarily by renewable energy providers such as wind or solar farms, most of which are out of state. So the clean energy is being produced in states other than California, and the polluters in California can continue to pollute so long as they by these permits. As this article here says, over half the regulated industries required to purchase permits actually increased emissions after the program started, and
"the neighborhoods that experienced increased emissions from regulated facilities nearby had higher proportions of people of color and low-income, less educated and non-English speaking residents. This is because those communities are more likely to have several regulated facilities located nearby. 'Good climate policy is good for environmental justice,' said Lara Cushing, the study’s lead author and an assistant professor of health education at San Francisco State. 'What we’ve seen from our study is that so far, California’s cap-and-trade program hasn’t really delivered on that potential.' The impact on these communities could be severe and long-lasting, the authors said."
TCI: Is it a Tax?
According to Investopedia here, a tax is defined as:
Taxes are involuntary fees levied on individuals or corporations and enforced by a government entity—whether local, regional or national—in order to finance government activities. In economics, taxes fall on whomever pays the burden of the tax, whether this is the entity being taxed, such as a business, or the end consumers of the business's goods.
For a more legal treatment of this subject, see the section below "Is it Legal?"
The governor of New Hampshire certainly thinks so, as he withdrew his state from TCI, as reported in the Boston Herald here.
“I will not force Granite Staters to pay more for their gas just to subsidize other states’ crumbling infrastructure,” Sununu said. “New Hampshire is already taking substantial steps to curb our carbon emissions, and this initiative, if enacted, would institute a new gas tax by up to 17 cents per gallon while only achieving minimal results. This program is a financial boondoggle and the people of New Hampshire will never support it.”
And here's what the Rhode Island Democratic Speaker of the House, Nicholas Mattiello said in the Providence Journal on Dec. 18, 2019:
High on the list of proposed tax increases the speaker says Rhode Island should avoid is a regional gas tax to fight climate change.
“I think my constituents pay enough gas tax,” Mattiello said. “People’s budgets are stressed. They rely on their cars to go to work and support their families, recreate with their families and friends.”
On Tuesday the Transportation Climate Initiative, a 12-state partnership working on a regional charge on carbon-burning fuels, released a framework that would raise prices at the pump anywhere from 5 cents to 17 cents per gallon. The revenue would be invested in mass transit or clean transportation technology. Mattiello cited the fact that Rhode Island’s 35-cent-per-gallon, indexed-to-inflation gas tax is already one of the higher rates in New England as a reason not to charge drivers more. By comparison, Massachusetts’ tax is 24 cents per gallon.
“Let’s put it in perspective: We in Rhode Island have one of the higher gas taxes in the country. We should not form a partnership with a state that doesn’t have one of the highest gas taxes. Their constituents can afford it,” Mattiello said. “Ours cannot.”
Even labor unions have come out against TCI. Vermont's AFL-CIO said in a statement in January 2020 (article here):
“This is a class issue for us,” President of the Vermont AFL-CIO David Van Deusen told the Herald. “This is a regressive funding move and the Vermont AFL-CIO is against more regressive funding for social or environmental programs. We don’t need workers paying more to get to their job sites.”
The union is urging the Vermont Legislature to vote against the Transportation Climate Initiative, a multistate compact that would implement a gas fee to reduce carbon emissions, and Gov. Phil Scott to veto it if it should pass.
Likewise, in his State of the State address, Vermont Governor Phil Scott said:
“I hear from Vermonters across the state, like those traveling long distances for work out of necessity, not choice, and others, like our seniors living on fixed incomes, who struggle to fill their gas tanks and heat their homes,” Scott said. “I simply cannot support proposals that will make things more expensive for them.”
Maine's governor is the most recent (Jan 14) skeptic of TCI. As reported by msn :
Gov. Janet Mills is the latest New England governor to signal reservations about the Transportation and Climate Initiative, the regional effort led by Gov. Charlie Baker’s administration to curb greenhouse gas emissions. In a statement reported Monday night by The Boston Globe, the Maine Democrat’s office said that “the challenges of climate and transportation issues for rural states like Maine are unique, and the state will be appropriately cautious when considering these issues.”
For the legal argument of why this is a tax and not a fee, see "Is it Legal?" below.
The chart to the left shows how some claim a cap-and-trade system is different from a tax since it shows that under a tax, you're charged based on your emissions whatever they are, while under cap and trade, you can achieve a low emissions level so that you don't have to pay anything at all. But this is not the case. Under cap and trade, the cap is always decreasing, so at some point in the future, zero emissions will be allowed and so every affected party will have to be charged for ever more expensive offsetting permits, no matter how little you emit. So yes, at some point, every industry under cap and trade will be forced to pay. And even under a pure carbon tax scheme, the tax doesn't have to be imposed on the first ton of carbon emissions. You can have tax-free emissions just as under a cap-and-trade system as shown in the chart, similar to income taxes where the initial amounts of income are not taxed or are taxed at a lower rate.
Another big difference between California's cap-and-trade system and TCI is that California taxes industrial and utility emitters while TCI taxes diesel and gasoline sellers. A utility, specifically, can be a low emitter by switching to renewable power sources such as wind or solar and so don't have to buy the offsetting permits. But how does a gasoline retailer switch? There's no way. The only way to pay less tax is to sell less product. And the only way to pay no tax is to sell no gasoline - i.e. go out of business. There is no renewable fuel at this time that a gasoline dealer can sell so it doesn't have to pay the tax. Thus it will pay ever increasing taxes as the cap lowers and fewer permits are allowed.
As noted above, California permits are selling at about $17 per metric ton. If we do the conversion math, this would amount to a 15.12 cents per gallon tax on gasoline. In the case of Connecticut, a relatively small state, about 1.5 billion gallons of gasoline are sold annually, which even at the 15.12 cent rate, would mean some $234 million of tax revenue for the state, an amount Connecticut would love to have. Now no one is going to stop buying gasoline because of a 15 cent/gallon tax. So carbon emissions won't be affected and the state just gets to keep hundreds of millions of dollars more. The real objective of the state is to make people stop buying fuel by making the tax so painful that they can no longer afford it.
Supporters of TCI note that the maximum estimated increase would be within the historic variations in the cost of gas, as well as average price differences between states. But if that's the only impact of TCI, then it won't change consumer behavior to move away from fossil fuels and towards electric vehicles. So the more interesting question is how high do gas prices have to be before people stop buying gas. According to this site here, Norway has the highest gas prices in the world, at $7.08 per gallon. It's no wonder that Norway also has the highest percentage of electric vehicles on the road, about 15% (full electric and hybrids). But it's not just the price of gasoline. Other incentives for electric car owners with a value of $8,200 per year include tax credits, no tolls, and free parking for electric vehicles (EVs) among others.
So looking at Connecticut again where the average price of gasoline is $2.66 per gallon per AAA, to get to $7.00 per gallon would require a gas tax of $4.34 per gallon which, with concomitant aggressive incentives like Norway's, would only result in 15% of the cars in the state being electric. With 1.4 million cars on the road in Connecticut, this amounts to about 210,000 electric vehicles, which falls short of the state's 300,000 target by 2030.
So if you hear TCI starting at a 15-17 cents per gallon gas tax, think again. They ultimately need a $4-plus gas tax, and aggressive incentives, and still they fall short of their 2030 goal. The next section describes how a state like Connecticut gets to its goal of 300,000 EVs by 2030, and eventually 80% overall lower carbon emissions in the transportation sector.
TCI: Social Engineering
If you look closely at California's 2030 Vision infographic to the left, you'll see the following of what they're looking forward to:
- High-density, transit-oriented housing
- Walkable and bikable communities
- Onroad oil demand reduced by half
Now as mentioned above, using Norway's model, a $4/gall gas tax plus $8,000 annual incentives only results in 15% of all cars being electric vehicles, while the objective is to reduce onroad oil demand by half or more. So how do we get there?
The answer lies with TCI's statement here:
Smart growth promotes compact mixed-use development patterns that support biking, walking and transit use while preserving and protecting natural resources and improving the quality of life of residents living in cities, towns and villages of all sizes.
Encourage land use practices that include all modes of transportation – cars, buses, trains, bikes and our own two feet - that build communities around existing and planned transit, reduce automobile dependence and traffic congestion, incorporate complete streets design, minimize the amount of land devoted to roads and impervious pavement, and support development of housing options that address the needs of residents of all ages and incomes.
The problem for TCI planners is that a state with mostly suburban and rural areas such as Connecticut is heavily transportation dependent, which means lots of private cars. If we were to reduce the suburbs (towns and villages notwithstanding where we suspect the wealthy will still get to drive around in their Teslas while everyone else gets mass transit), and pack people into "high-density" cities, we wouldn't need so many cars. People would walk or bike to work and take mass transit. This is the social engineering aspect of TCI and it comes with a political benefit as well, since cities vote almost exclusively Democratic, while suburbs and rural areas trend Republican. Of course if you're a Democrat, you may consider this a good thing. So TCI planner realize that high gas taxes and incentives are not enough to move to an all-electric economy. You need to move people out of the suburbs and into the cities as well, which could result in dense, dystopian Bladerunner-like cities as shown to the left.
TCI: Is it Legal?
TCI May Violate the Commerce Clause of the United States Constitution
One of the purposes of TCI is to have allowance costs, in the form of a tax, passed along to consumers of gasoline and diesel -- i.e., to the public -- in the form of higher prices. This involves a complex, multi-state taxing and regulatory authority that establishes policies and procedures to set the tax rate, its collection and distribution to the states. This tax occurs even when petroleum product moves across state lines, or across international borders. This tax is distinct from a fee. Although the states may delegate to administrative agencies the power to set and to collect licensing and regulatory fees, see American Ass’n of Bioanalysts v. Axelrod, 484 N.Y.S.2d 288, 290-91 (3d Dept. 1985), the revenues created by TCI are not in the nature of fees. The test for whether revenue collected by an administrative agency constitutes a fee or a tax is to compare the costs of administration with the revenue received. That these agencies may generally be authorized in their charters to implement environmental programs does not change the fact that, through TCI implementation, they are raising revenues for other programs, such as energy efficiency and clean energy technology. Where “the sums collected through a licensing or regulatory measure exceed the cost of administration, then it can be deemed a revenue act [i.e., a tax] regardless of its label.” Mobil Oil Corp. v. Town of Huntington, 380 N.Y.S.2d 466, 474.
In fact, in any state that participates in the TCI compact and that auctions most or all of the allowances allocated to that state, the state’s share of the auction revenue can be expected to exceed substantially the program’s administrative costs in that state. That is, in fact, one of the main functions of an auction -- to raise revenues that can be used to meet the state’s desire for funds to advance various policy goals, such as promoting renewable or low-carbon energy sources and other means of energy generation and use or other as-yet-undefined goals. Such a multi-state taxing scheme using a cap-and-trade system may violate the Commerce Clause of the Constitution. The Commerce Clause describes an enumerated power listed in the United States Constitution (Article I, Section 8, Clause 3) which states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." In creating a multi-state taxing system, the TCI, the states are infringing on the powers of Congress and federal government to regulate and tax across state lines.
TCI May Violate the Compact Clause of the United States Constitution.
TCI would run afoul of the Compact Clause of the United States Constitution, which provides that “No State shall, without the Consent of Congress, . . . enter into any Agreement or Compact with another State, or with a foreign Power. . . .” U.S. CONST. art. I, § 10, cl. 3. TCI is a multi-state agreement -- created without congressional approval -- by which participating states obligate themselves to meet a set of common rules and shared limitations and compliance requirements. Because TCI encroaches upon federal supremacy, it constitutes an unconstitutional multi-state compact
The Test for a Compact Clause Violation
Historically, courts have identified three categories of interstate compacts that may be subject to the Compact Clause’s limitations: (1) compacts to resolve state boundary disputes; (2) compacts to institutionalize one-time interstate projects, such as building a bridge; and (3) compacts to create ongoing administrative agencies and regulatory programs addressing interstate (or potentially international) issues. TCI falls clearly within the third category. Under the Supreme Court’s interpretation of the Compact Clause, not all interstate agreements require congressional approval. Virginia v. Tennessee, 148 U.S. 503, 517-21 (1893).
Rather, the Court has held that the Compact Clause applies only to “the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States.” Id. at 519. Congressional approval is required where an interstate agreement will result in “the increase of the political power or influence of the States affected, and thus encroach . . . upon the full and free exercise of Federal authority.” Id. at 520; see also U.S. Steel Corp. v. Multistate Tax Comm’n, 434 U.S. 452, 479 n.33 (1978) (holding that relevant test for Compact Clause violation is whether a multi-state agreement presents “a threat of encroachment or interference [with the just supremacy of the United States] through enhanced state power. . . .”); id. at 475; New York v. Trans World Airlines, Inc., 728 F. Supp. 162, 183 (S.D.N.Y. 1990) (“[T]he Compact Clause applies only where the challenged interstate agreement embraces actions a state could not take acting alone.”). One way a compact could enhance state power would be to allow two or more states to obtain joint power over interstate commerce that neither could have gained individually. U.S. Steel, 434 U.S. at 474-75.
Significantly, to show “encroachment” on federal supremacy, the Compact Clause does not require a court to find that state action is fully preempted by federal law. “Encroachment” under the Compact Clause instead occurs in the presence of merely potential impacts on federal supremacy. This means that the Compact Clause does not require that federal and state laws conflict, as required in the preemption context, but rather that the Clause protects federal supremacy from the potential for such conflicts in the future. U.S. Steel, 434 U.S. at 472 (The “pertinent inquiry is one of potential, rather than actual, impact upon federal supremacy.”). TCI encroaches, potentially or otherwise Congress’s exclusive right to regulate and tax across state lines.